Optimistic Investors Push Shandong Ruifeng Chemical Co., Ltd. (SZSE:300243) Shares Up 41% But Growth Is Lacking

Shandong Ruifeng Chemical Co., Ltd. (SZSE:300243) shareholders would be excited to see that the share price has had a great month, posting a 41% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

Since its price has surged higher, Shandong Ruifeng Chemical's price-to-earnings (or "P/E") ratio of 40.6x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 33x and even P/E's below 20x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

The earnings growth achieved at Shandong Ruifeng Chemical over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shandong Ruifeng Chemical

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shandong Ruifeng Chemical will help you shine a light on its historical performance.

How Is Shandong Ruifeng Chemical's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Shandong Ruifeng Chemical's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 28%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 53% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Shandong Ruifeng Chemical's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Shandong Ruifeng Chemical's P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Shandong Ruifeng Chemical currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 4 warning signs for Shandong Ruifeng Chemical (2 are potentially serious!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.